This article provides a fundamental analysis of Reliance Industries Ltd, S Kumar Nationwide Ltd, Bharat Heavy Electricals Ltd, Jain Irrigation Systems Ltd and Container Corporation of India Ltd.
In order to benefit the maximum from this article, an investor should focus more on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc used to get the information. This will help her in improving her stock analysis skills.
Analysis of Reliance Industries Ltd
Q: First of all, I would like to thank you for such helpful articles. You are doing great work sir by guiding people like me. We spend so much time on news channel to spot next big thing rather than going systematically. Now by reading your article, I am fairly convinced that stock market can be decoded. Sir, I have invested in S Kumar Nationwide, Jain Irrigation, BHEL and Reliance. I have been investing since 3 years. With every decline in these stocks, I tend to add more. But now i feel i am stuck up. Please advise.
Dr Vijay Malik’s Response
Thanks for your feedback. I am happy that you feel that the website can help you in understanding stock markets and selecting good stocks for investments. Wishing you good luck with your investing journey.
About your stock holdings:
Reliance Industries Ltd:
Reliance Industries Ltd has been considered as a safe bet to make money in stock markets as it used to be the largest company of India in many aspects (sales, market cap etc). However, recently it has not been able to grow its business as expected. Sales growth has been slowing down year on year. Profit margins are falling consistently. The operating margin has come down from 19% in 2005 to 8% in 2014. Net profit margin has reduced from 15% in 2008 to 6% in 2014.
There are significant regulatory issues that Reliance Industries Ltd faces on its oil & gas exploration operations.
Shale gas operations in US, are expected to be hit in light of fall in oil prices. If Reliance Industries Ltd is not able to get its house in order soon, then I believe that many other attractive opportunities exist in the market, which should be explored by investors.
Analysis of S Kumar Nationwide Ltd
S Kumar Nationwide Ltd has been making losses currently. Its operating earnings of Rs. 763 cr. are barely sufficient to meet interest costs of Rs. 736 cr.
The debt of S Kumar Nationwide Ltd has been increasing very fast as the company is not able to collect cash from its customers. In last 2007-13 years, it has shown profits of Rs. 943 cr. but collected only Rs. 340cr as cash from operations, which is not a good sign. As a result, S Kumar Nationwide Ltd has to resort to cash from financing of about Rs. 2500cr. over 2007-13 to run its operations. Inventory is getting accumulated and customers are not paying up. It does not seem a good company to remain invested.
Analysis of Bharat Heavy Electricals Ltd
BHEL is facing tough times.
Sales of BHEL have been degrowing in recent years from Rs. 48,500 cr in 2013 to Rs. 32,000 cr in last 4 quarters now. Margins (OPM) have fallen from 21% in 2012 to 11% currently. PAT margin has fallen from 15% 2012 to 7% now.
BHEL is also not able to realize money from its buyers (last 10years: PAT is 38,500 cr and CFO is about 22,000 cr). Competition is taking its toll on BHEL.
Analysis of Jain Irrigation Systems Ltd
Company is growing while compromising its profitability. OPM has fallen from 19% in 2011 to 11% currently. Profits have been wiped out. Despite increasing sales, it is making losses. It is relying mainly on debt to sustain its operations. It has increased its debt by almost 10 times in last 10 years from Rs. 332 cr. in 2005 to Rs. 3600 cr. in 2014. I believe there can be other good opportunities, which can be found in the market as compared to Jain irrigation.
I suggest you read the complete series “Selecting Top Stocks to Buy”. It would help you understand the indepth analysis of stocks and find good stocks for investments.
I suggest that you make a check list of criteria for stock selection and invest in stocks which meet your parameter You may read about my stock picking checklist here:
Hope it helps to answer your queries.
Container Corporation of India Ltd
Q: Hello Dr. Vijay, I was analyzing Container Corporation of India. I think its future prospects are good. Wondering if I could get some insights on it from you? Thanks!
Dr Vijay Malik’s Response
Thanks for writing to me!
Analysis of Container Corporation of India Ltd:
Container Corporation of India (CCI) looks a good business. It has been growing consistently over the years, though the growth rate is moderate 8-10% year on year. Profitability margins are maintained. Operating profitability margin (OPM) has been consistent at 22-25% and net profit margin (NPM) is consistent at 20-22% year on year. The company is debt free, therefore there is no interest burden that might weigh the company down in bad times.
Cash collections are good. Almost entire profits are being collected in cash year on year. Company seems to be operating in advance payment model as the receivables days outstanding is only 2 days, which is another healthy sign. Dividend payments have been increasing with increasing profits. Overall, the company seems good.
However, when I look at the current valuation levels, P/E is about 30, which is high by any measures. Very little margin of safety is built in at that price. Stock price has run up in last one year. It has risen 100% in last one year. The anticipated growth of business by infrastructure push of current govt. and potential economic recovery seems to have already been factored in by the market in current stock price.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
I feel CCI is a good company with a good business. However, the current market price has already factored in the good things and stock is already trading at high valuations. I prefer investing in conservatively financed growing companies, which trade at low P/E. CCI, misses valuation parameter.
Hope it helps. Rest you should take your own call!
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Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.